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Consolidate loans to mortgage
Question: Please help... Would it be a good or bad decision to put a non-consolidated Parent Plus Loan into a home refinance? The refinance rate is 4.5 and the student loan is 7.9 (!) I have two other consolidated loans at 3.25 and another at 5.875. I'm currently over the limit (2x) of interest I can deduct, so if included it, the interest it would be deductable, but does it make sense to increase my mortgage by so much (an additional 32K on a 156K mortgage? And I will have to pay an additional .25 point to do the cash out. Will the Plus Loan interest rate be reduced in July? Would it make sense to wait and consolidate? My refinance will settle before I know the next rate. Will the deductable student loan interest rate be raised? I have a line of credit rate currently at 2.5, but they will average 3 years interest to do a fixed loan, so that w on't help now. I would rather keep it separate, but am temped by the 4.5 rate. I want to make the best short and long term decision.... Thanks in advance for considering my question. Mary, Garrett Park, MD
Answer: I want to address the core of your question. I believe one reason why so many middle-income homeowners got into financial trouble in recent years is that they consolidated their debts into first and second mortgages. Yes, the interest payments are tax deductible. But I don't think the tax deduction is worth the extra risk.
For instance, it always upset me when financial advisors would recommend consolidating credit card debt into a mortgage. That's crazy. I feel the same way about student loans. There is financial flexibility with Parent Plus loans, such as a graduated payment plan, income sensitive payment plan, and an extended payment plan. (Of course, the price for taking advantage of these options is the overall cost of the loan goes up.) If you pay off the loan by rolling it into your mortgage you'll lose that flexibility, and increase the risk of losing your home if you have a job or income setback.
I couldn't disagree more.
You have the possibility of losing flexibility, if you had it at all, but you'll gain money in your pocket.
OK, you have a mortgage with a $2500 payment, and a student loan with a $180 payment. If things are really tight making that $180 payment, how's it looking to hold on to your house?
Let's say you get a twelve-month forebearance on your student loan. That's the equivalent of making your mortgage payment 26 days late. You'd be tripping over a dollar to pick up a dime. It's flexibility you don't need anyway.
I say roll in all the loans to the lowest after-tax rate, change your W4 withholdings to give yourself an immediate pay raise.
The rules have always been that if you lose your job, you lose your house - end of story. Rolling all debts under your mortgage doesn't change that. The way I see it, doing so actually reduces your risk exposure, because if the bank forecloses, you're not still stuck with your student loan. You've been paid by Uncle Sam to make your problems their problems.
